Contents

Capital Relief Trades

Inaugural infrastructure CRT launched

Synthetic securitisation marks global first

The African Development Bank (AfDB), alongside Mariner Investment Group, the European Commission, Mizuho and Africa50, has issued a debut US$1bn capital relief trade (CRT) backed by a pan-African portfolio of loans to infrastructure projects and financial institutions. The transaction, dubbed Room2Run, is not just a first for the AfDB, but also marks the first ever transaction of its kind between a multi-lateral development bank (MDB) and private sector investors.

The transaction was structured as a synthetic securitisation by Mizuho and transfers the mezzanine credit risk on a portfolio of around 50 loans from across the AfDB's non-sovereign lending book. This includes power, transportation, finance sector and manufacturing assets spanning the African continent.

Mariner was lead investor on the deal through its International Infrastructure Finance Company (IIFC) II fund,  taking 80% of the senior tranche, while Africa50 invested alongside, taking 20% of the private senior tranche. Additionally, credit protection is being provided by the European Commission's European Fund for Sustainable Development in the form of a senior mezzanine guarantee.

Molly Whitehouse, director at Mariner, explains that Room2Run is aimed at facilitating lending for the AfDB, which this deal achieves by freeing up more than US$650m in lending headroom. This can now be deployed in a range of projects across the continent, while matching Mariner IIFC's strategy as an impact investor.

In terms of the motivation for the deal, Whitehouse explains: "The G20, and in particular through the leadership of Canada, Sweden, and Denmark, has for some time urged development banks to better manage their capital and to do more with the existing capital that shareholders contribute. In particular, they have highlighted using synthetic securitisations as a way to do this." She adds that this transaction proves the usefulness of risk transfer for development banks and the role that private investors can play in funding lending for a supranational organisation.

In terms of hurdles presented by the transaction, Whitehouse says one was the time taken working with the rating agencies as, for one reason, Moody's and Fitch took a more qualitative approach, while S&P took a more quantitative approach.

While a rating wasn't assigned, the objective was that the rating agencies would reflect the value of the transaction into their overall rating on the bank. This impacts where the bank can fund its wholesale debt and, in turn, how it can lend to its policy borrowers, so it was important for all parties, Whitehouse says, that the rating agencies and the bank's shareholders viewed the transaction as accretive to capital.

Furthermore, the 2% first loss position was taken by the bank, while a 15.25% thick investor tranche followed, with Mariner taking 80% of this and the Africa50 taking 20%. A further 10% thick unfunded guarantee was also provided by the European Commission, above the investor tranche.

While, structurally, the deal resembles other CRTs, Whitehouse explains that the investor/guarantee tranche was much thicker than usual due to the conservative views taken by the rating agencies, as it was a first for an MDB. Whitehouse suggests that with further transactions and, as the portfolio performs over time, the tranches of transferred risk may evolve toward the commercial bank market.

In terms of general challenges in the deal, a large degree of time and patience was required with discussions with the AfDB having started over four years ago. However, the payoff has been huge, says Whitehouse, especially as it created a framework that can be used by other development banks across the globe for similar transactions.

On this note, Whitehouse comments: "There has been significant interest from other development banks in following the progress of Room2Run. We have workshopped the deal at various MDB community events, so the other institutions have been reasonably well informed as we have developed the technology. The hope is that now that the viability of this market has been proven, other development banks will integrate these capacities into their capital markets tool kit, extending their reach and resources across the MDB community."

Furthermore, the deal was well received by Mariner's investor base with "quite positive feedback from our LPs," says Whitehouse. She adds: "As with our other CRT investments, we intend to be a buy-and-hold investor, really benefitting from the servicing approach of AfDB in the long term management of the reference portfolio."

Room2Run also comes at a time of increasing interest in infrastructure CRTs with a number of banks now looking at managing their capital around infrastructure portfolios. Additionally, Whitehouse says that the infrastructure CRT market is broadly "pretty strong and active and there is a heavy pipeline of deals coming through" adding that Mariner has done over "US$10bn in infrastructure deals", with further planned transactions bringing this up to US$12bn.

Most infrastructure transactions are done by banks domiciled in Europe and the UK, although assets backing the deals can be global. Whitehouse comments that geographical diversity in the deals doesn't pose further risks, because infrastructure is found to perform well across jurisdictions – only really the US has seen a higher loss rate on infrastructure CRTs, mainly because they were tied to energy sector properties which were subject to market volatility.

Furthermore, while banks are increasingly looking to manage capital around their infrastructure portfolios, the market is typically bilateral with transactions not publicised, which is in line with Mariner's approach.

"We prefer bilateral trades" explains Whitehouse, "as we are comfortable analysing the portfolio and structuring the deals ourselves. It also costs the same for us to effectively deploy US$200m in equity as it would to take part of a tranche for US$20m - so we prefer bilateral trades."

She says also that while many investors might want to participate in project finance or infrastructure portfolios, they are a specialised asset class that requires a certain degree of expertise. Likewise, Whitehouse says that portfolios are often "lumpier" than the granular portfolios seen in an SME CRT, for example, and that this lumpiness, along with the complexity, limits investor participation and this feeds into seeing bilateral structures more often.

Structurally, infrastructure CRTs are much like other CRTs, says Whitehouse, although they do not feature automatic replenishment of the pool as in more granular transactions. She explains: "In an infrastructure CRT, we work with our bank counterparties to select new assets for replenishment."

"We are generally able" continues Whitehouse, "to get assets approved quite quickly – within about two weeks. We can also speed up this process by pre-approving asset classes that can be added to the pool, should existing assets amortise more quickly than expected."

In terms of the investor landscape there is also strong appetite for the transactions, with most investors being large, buy-and-hold institutional investors from the US, UK and Europe that now see the value in infrastructure CRTs, alongside other vanilla CRTs.

Looking ahead, more harmonised documentation and structuring practices has fuelled greater interest in risk transfer technology and Whitehouse concludes that banks are starting to see that "utilising risk transfer technology on their infrastructure portfolio can be a virtuous cycle, as it can enable them to be more competitive on the primary market as well."

RB

NPLs

GACS expansion?

UTP extension questioned

The recent extension of the GACS guarantee scheme is expected to further fuel Italian non-performing loan securitisation issuance (SCI 5 September). However, the programme is unlikely to be expanded to cover unlikely-to-pay (UTP) loans, due to political constraints.

Following the European Commission’s approval of the GACS extension, Scope reaffirmed its forecast of a total disposal of Italian NPLs of €100bn in 2018, which includes GACS-eligible securitisations and portfolio sales. However, the rating agency expects the guarantee to be extended as is - excluding UTPs or leasing receivables - as the inclusion of additional assets would alter the scope of the original decree too much for it to be extended by ministerial decree.

Even if the scope were broadened, there is unlikely to be enough time to structure a transaction mainly consisting of UTPs or leasing receivables before the March 2019 expiration (SCI 7 August). The management of UTPs would also require a different servicing approach and it will take some time before the servicers active in the NPL market have acquired the necessary skills, resources and processes to manage UTP ABS transactions in an efficient way.

Nevertheless, the challenge of extending the scheme to UTPs is a political rather than a technical one. Massimo Famularo, board member at Frontis NPL, notes: “Secured UTPs which are close to becoming NPLs, due to the prolonged absence of cashflows, could be appropriate for a GACS extension, while also helping banks avoid high provisioning - compared to NPL deals - and get the GACS benefit.”

He continues: “However, you have to ask yourself why such an extension is necessary. The UTP securitisation market is working fine, given the overall performing nature of current UTP stock. Consequently, if the market is doing its job, there is no need for state interference that would give banks an unfair advantage through lower provisions.”

Italian banks have made extensive use of the GACS scheme. To date, Scope has rated 10 GACS-eligible securitisations in 2018, through which the sellers have reduced their NPL exposures by some €38.7bn.

Equally, NPL portfolio sales during 2018 have amounted to around €35bn, according to Scope data. For the remainder of the year, the rating agency expects around €30bn of NPLs to be sold either through portfolio sales or GACS securitisations.

SP

Structured Finance

Irish RMBS focus

European ABS market update

A rare Irish non-conforming RMBS has caught the attention of European ABS market participants, following the deal’s roadshow last week.

“The Dublin Bay Securities senior notes are being talked at around 65bp, with the deal expected to price soon,” says a trader. “In comparison, proper prime senior RMBS paper would typically price at around 12bp or 13bp.”

The trader notes that there are not many non-performing loans in the pool and that tranches from A to E are being sold. The preliminary size of the deal is €584m.

“Few Irish RMBS have been issued so far in 2018. The last large transaction - Grand Canal Securities 2 - was in November last year,” the trader continues.

Meanwhile, the European secondary ABS market is subdued, with many traders focusing on the new issue pipeline. “There are only a few BWICs out today,” the trader adds. “Some people are busy, but I think many people are waiting for new issues. It’s steady, but it has been quiet.”

Among the BWIC auctions scheduled for today were a European CLO list (with six line items), a European RMBS list (three line items) and a UK RMBS list (17 line items).

TB

CDO

Widening spreads eyed

US CDO secondary market update

Several ABS CDO bonds are expected to be in high demand today, which have not been prevalent on the secondary market for several months. Trups CDO paper has been more common on BWICs.

“When Trups CDO bonds come around, there is a lot of interest,” says one trader. “But they are not predictable, unfortunately.”

Meanwhile, mezzanine CLO tranches have seen some softening in the secondary market because of the recent preference for shorter paper. A handful of equity tranches are also expected to be out for the bid today.

“I would say with the week before one of the biggest conferences of the year, ABS East,” continues the trader, “there has been a lot of excitement. Everyone is excited to take advantage of any spread widening. Many accounts are waiting to put their money to work next month.”

He concludes: “I think the last week of September is going to set the stage for the rest of the year. It could be a bit wobbly because a lot needs to go through the pipeline, but - having said that - I don’t think you’ll see any cracks in management or anywhere else.”

TB

RMBS

Aussie slow-down

Australian RMBS primary market update

Activity in the Australian RMBS primary market is slowing down due to overcrowding. Four Australian lenders are currently in the market with new deals.

Liberty Financial and Pepper Homeloans are prepping non-conforming RMBS, while RedZed Lending Solutions is prepping a mixed prime/non-conforming deal and Credit Union Australia is marketing a prime transaction. “The regular issuers are operating in the space,” says one trader. “There has been heightened activity over the past year or so, as more dealers have become involved.”

The trader mentions concern about the housing market in Australia being overheated. “It has had a good ramp over the past five years, but lately – in the last six months or so – it has been starting to slow.”

Property prices across the eight Australian capital cities fell 0.6% year-over-year in June 2018, the first annual drop in six years, owing to tighter credit conditions and a dip in investor demand. At 3.9%, Sydney experienced the largest annual decline since March 2009.

“I’m mainly focused on the primary market at the moment,” the trader continues. “There are a lot of deals coming out and a lot of interest in the Dublin Bay portfolio as well [SCI 18 September].”

The Dublin Bay Securities transaction is set to price by Friday, according to the trader.

TB

Structured Finance

SCI Start the week - 17 September

A look at the major activity in structured finance over the past seven days

Pipeline

ABS is still dominating the pipeline, with several deals coming from the auto space.

These include: US$534.032m ARI Fleet Lease Trust 2018-B, US$1.362bn GM Financial Automobile Leasing 2018-3, US$327.87m Navistar Financial Dealer Note Master Owner Trust II 2018-1, US$407.83m Prestige Auto Receivables Trust 2018-1

In non-auto ABS there are also a number of transactions waiting to price: US$809.93m CNH Equipment Trust 2018-B, Golden Credit Card Trust Series 2018-4, €638.9m Purple Master Credit Cards Notes Series 2018-1, $300m Trafigura Securitisation Finance, US$577.544m SoFi Professional Loan Program 2018-D

RMBS was also fairly busy last week, with several deals marketing: $258.781m Freddie Mac STACR Securitised Participation Interests Trust Series 2018-SPI3, Liberty Series 2018-2 Trust, MCAP RMBS, Pepper I-Prime 2018-2 Trust, A$375m RedZed Trust Series 2018-1, $362.733m Sequoia Mortgage Trust 2018-CH4, A$500m Series 2018-1 Harvey Trust

A slightly lighter week for CLOs, as investors wait for ABS East, resulted in the following hitting the pipeline: US$938.904m ALM VII (R)-2, US$408.25m Carlyle US CLO 2018-3, $407.20m Crestline Denali CLO XVII, $501.71m Diamond CLO 2018-1

Just the one CRE CLO also came through: $300m Greystone CRE 2018-HC1

The light trend for CMBS continues with only two deals coming through: $341m The Bancorp Commercial Mortgage 2018-CRE4 Trust, US$1.169bn BANK 2018-BNK14.

Pricings

The prospect of ABS East around the corner is possibly also contributing to a fairly light week for pricings, with many deals coming from Europe.

In auto ABS the following priced: €620m Auto ABS Spanish Loans 2018-1, CNY3.92bn VINZ 2018-3 Retail Auto Loan Securitisation Trust, £407.5m Silver Arrow SA Compartment Silver Arrow UK 2018-1. One container ABS priced in the form of US$343.5m CAL Funding III Series 2018-2 and a student loan deal also priced: $544mn Sallie Mae Bank 2018-C.

Just the two RMBS priced this week in the form of £1.93bn Gosforth Funding 2018-1 and, across the pond, a Freddie Mac deal: US$820mn STACR 2018-DNA3

Finally, in CLOs a mix of Euro and US deals priced: €409.50m Avoca CLO XIX Designated Activity Company, €416.5m Jubilee CLO 2016-XVII, US$460.85m Magnetite 2015 XIV-R, US$ $400m BCC Middle Market CLO 2018-1, $457.8m Palmer Square CLO 2018-3, US$505.1m RR 5.

Editor’s picks

Brexit uncertainty highlighted: Brexit has so far had a neutral impact on capital relief trades, but uncertainty is a major concern with a lack of clarity over how EU law and CRR will be incorporated into UK law…

Madden resolution urged: The US Treasury supports the freeing up of marketplace lenders from constraints resulting from the Madden vs Midland case and also suggests improvements to the federal student loan sector…

Deal news

• Banco Santander Totta has mandated an ABS, according to Rabobank, or a wholeloan sale of a portfolio of Portuguese non-performing loans, valued at €482m (gross book value). 51.5% of the exposures is thought to be secured. The ABS transaction or portfolio disposal could follow depending on investor feedback, market conditions and the issuer’s discretion to go ahead or not.

Structured Finance

Market moves - 21 September

All the latest company developments and new hires in the structured finance sector

Acquisitions

HPS Investment Partners has acquired Tålamod Asset Management. HPS will retain Tålamod's investment team and other employees based in Dallas, while Andersen Fisher, founder and managing member of Tålamod, will join HPS as md. Kyle Mapes and Jay Steen will join HPS as executive directors, after joining Tålamod in 2008. All employees of Tålamod will become HPS employees in 4Q18.

Marsh & McLennan Companies (MMC) has reached an agreement to acquire Jardine Lloyd Thompson Group (JLT). Following the completion of the transaction, Dominic Burke, group chief executive of JLT, will join MMC as vice chairman and serve as a member of MMC’s executive committee. Under the terms of the transaction, holders of JLT’s common shares will receive cash consideration of £19.15 per share. Total cash consideration equates to US$5.6bn in fully diluted equity value, or an estimated enterprise value of US$6.4bn. The transaction will be funded by a combination of cash on hand and proceeds from debt financing and MMC has committed bridge financing from Goldman Sachs. The transaction is expected to close in spring of 2019, subject to receipt of required antitrust and regulatory approvals and the approval of JLT shareholders.

BDC no-action relief

GC Advisors has received a no-action letter from the US SEC in connection with proposed CLO transactions by Golub Capital BDC and Golub Capital Investment Corp. The letter confirms that, under the risk retention rules, the GC Advisors is considered to be the sponsor of the BDCs’ CLOs and therefore the transactions comply with the risk retention requirements.

CLO equity investment

Fair Oaks Income’s FOMC II fund has acquired in the primary market US$26m notional of equity and US$5.7m of class F notes - representing 62.5% of each class - in the HPS 13-2018 CLO. Managed by HPS Investment Partners, the CLO's current target portfolio has a principal value of US$510m across an expected 255 unique bank loan issuers, with an expected weighted average exposure per issuer of approximately 0.47%. The estimated potential total return for this investment, blended across both note classes, is between 14% and 15% per annum.

Europe

Arrow Global Group has hired Tim Tomlinson as UK head of client development. At Arrow Global, Tomlinson will cultivate relationships with key UK creditor clients and collaborate with the pan-European origination team regarding ongoing client developments and forthcoming transactions. His most recent role was head of new business at PwC.

Cheyne Capital Management has hired Richard Cazenove as partner and senior portfolio manager to the Cheyne group's strategic value credit (SVC) business. Cazenove’s role follows 15 years at BlueBay Asset Management where he worked across distressed and opportunistic credit strategies.

Reed Smith has hired David Barton to the firm’s financial industry group (FIG) as counsel, based in London. He will advise on structured debt, securitisation and other asset-backed debt capital market transactions. Barton, who will arrive in late September, joins the firm from NatWest Markets, where he served as managing legal counsel.

FHFA rule proposal

The Federal Housing Finance Agency (FHFA) is issuing a proposed rule to require Fannie Mae and Freddie Mac to align programmes, policies, and practices that affect the prepayment rates of TBA-eligible MBS. The objective of the proposed rule is to enhance the overall liquidity of enterprise TBA-eligible MBS by supporting their fungibility without regard to which enterprise is the issuer. The rule would apply to both the enterprises' current offerings of TBA-eligible MBS and to the new Uniform Mortgage-Backed Security (UMBS) which will be implemented in June 2019. FHFA, as conservator, has previously responded to industry input received during development of the Single Security Initiative by imposing alignment mandates on the enterprises and publishing a prepayment monitoring report.  The proposed rule would codify the alignment mandates and, in turn, indicate to market participants that FHFA will require that the enterprises seek to maintain consistent prepayment rates. FHFA invites interested parties to submit comments on the proposed rule via FHFA.gov within 60 days of publication in the Federal Register or via mail to their office in Washington D.C.HFA proposal.

Illimity launched

Italian special acquisition vehicle SPAXS has completed its purchase of 99.2% of Banca Interprovinciale through paying approximately €44.7m in cash (representing about 79.9% of the bank’s share capital), plus the contribution to SPAXS of the bank’s shares (representing approximately 19.3% of the bank’s share capital). The transaction is intended to create a new bank named illimity, which will specialise in the Italian SME market and aims to become a leading operator in the UTP and NPL (secured and unsecured) sectors. The board consists of nine members: the ceo Corrado Passera (formerly the ceo of Intesa Sanpaolo); the chair Rosalba Casiraghi; and the directors Massimo Brambilla, Giancarlo Bruno, Elena Cialliè, Bob Diamond, Sigieri Diaz della Vittoria Pallavicini, Alessandro Gennari and Maurizia Squinzi.

ILS

Fidelis Insurance has appointed Richard Brindle, chairman and group ceo, to the additional role of group chief underwriting officer while Ben Savill, previously group chief underwriting officer, will leave to pursue other opportunities. To support the underwriting teams, Patricia Roufca, group general counsel, will assume the new and additional role of coo while Hinal Patel, group cfo, becomes ceo of Fidelis Insurance Bermuda.

Maiden Lane liquidated

The New York Fed has sold the remainder of its Maiden Lane Securities holdings (SCI passim). Net proceeds from past sales, conducted by BlackRock Solutions, as well as cashflow the securities generated while held in the portfolio enabled the full repayment of the New York Fed’s loan, plus interest, on 14 June 2012 and of the subordinate loan JPMorgan made to ML, plus interest, on 15 November 2012. The New York Fed’s management of the portfolio resulted in a net gain of US$2.5bn, including interest of US$765m, for the benefit of the public. ML will retain minimal cash to meet any trailing expenses in order to facilitate an orderly wind-down.

New venture

Waterfall Asset Management has announced the launch of its Specialty Commercial Finance Group (SCFG).  SCFG, led by Andrea Petro, has been established to provide high yield senior secured debt to specialty commercial finance companies. Petro, who began her career at Transamerica Business Credit, has spent 17 years with Wells Fargo’s capital finance's lender finance division.

US

Benefit Street Partners has hired Stephen Sachman and Patrick White as mds to its private debt origination team. Sachman will be based in the firm’s New York office while White will work in the firm’s newly established San Francisco office. Prior to joining Benefit Street, Sachman spent 12 years as md at BlackRock, whereas White was previously at md and co-head of technology at Monroe Capital.

Owen Butler is to lead BlackRock’s US CLO business. Butler, who took over the role last month following Scott Snell’s departure, is based in New York and reports to James Keenan and Tim O’Hara, co-heads of global credit. Butler was previously a member Blackrock’s financial advisory group and before joining the firm he was head of credit risk at LBBW Asset Management Ireland, overseeing structured credit products and corporate and financial investments.

Crayhill Capital Management has hired Stefan Hoefer as md and will be a senior member of Crayhill's investment team. His responsibilities will include helping to source, underwrite, structure, execute and manage private credit investments. Prior to joining Crayhill, he was a senior analyst on the multi-strategy team at BBT Capital, where he focused on investing across the capital structure.

Morgan Stanley has moved Paul Burke, its co-head of loan solutions, to New York as part of a new initiative to win more business from US financial institutions. The new initiative will include looking at NPLs, re-performing loans, low margin and high LTV business. Burke will report to Jon Walton, head of structured finance, and work alongside the other co-head of loan solutions, Noreen Whyte, who remains in London.

Geoffrey Jones and Gabriel Goldstein have both been hired by PIMCO to the role of evp and portfolio manager. They will both be based in the firm’s Newport Beach office and will focus on private and opportunistic credit investments, including corporate lending, special situations, and distressed credit. They will report to Marc Seidner, md and cio of non-traditional strategies. Jones and Goldstein both join PIMCO from Tennenbaum Capital Partners where they were mds.

Tetragon Credit Income Partners has hired Scott Snell, the former co-head of BlackRock’s US CLO business, as a portfolio manager. The firm is considering investing across the capital structure and may set up separately managed accounts or other opportunistic funds to invest in CLO debt, potentially in both the US and Europe.